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Who pays more for insurance

December 4, 2009

Donald H. Taylor, Jr.

DURHAM -- What will happen to private health insurance premiums if the bill being debated in the Senate becomes law? The Congressional Budget Office recently provided a comprehensive answer that depends on whether you have employer-provided or individually purchased insurance.

For the 160 million people currently insured by an employer, total premiums for similar insurance would cost slightly less - from a negligible change to a 3 percent reduction in premiums. Premiums for employer-provided policies are currently paid for by employers and employees together, with the relative share determined by the benefits provided by your job. This would continue.

For the 14 million people who have individually purchased insurance coverage, total premiums would be between 10 percent and 13 percent higher in 2016, if the Senate bill passed. However, the insurance coverage would be more expansive (cover more services, pay more of the cost if you get sick) than what is covered by typical individual policies. And 23 million people would buy private insurance through the newly created exchanges in 2016, according to the CBO. When some shifting between categories is factored in, the total number of persons covered by individually purchased policies would be expected to increase to 32 million by 2016.

The expanded coverage is the primary reason that total premiums would be higher for those in the individual market. And pre-existing conditions would no longer be a reason for denial of coverage. The addition of younger, healthier persons to the insured risk pool through an individual mandate would make premiums in the individual market less than they otherwise would be.

About 6 in 10 of the 32 million people covered in the individual market would receive a federal subsidy to buy a private policy in 2016. On average, subsidies would cover two-thirds of the total premium cost, but the amount any individual or family would receive is related to their income.

For persons receiving subsidies, their share of total premiums would be much lower than what an individually purchased policy would cost if no reform passed. Subsidies to help the uninsured buy private policies represent a major expenditure of the Senate reform bill and a tangible cost of expanding insurance coverage.

The bottom line: If the Senate bill becomes law, employer-based insurance premiums for 160 million people would be slightly lower. Premiums for 14 million individually insured persons would be about 10 percent higher, but coverage would be better, and most purchasing such coverage would receive a subsidy to defray the cost of premiums. And there would be 28 million fewer uninsured persons, with 23 million persons buying their own policies in newly created exchanges and 14 million being covered by Medicaid in 2016.

The CBO assessment focuses on 2016, at which time the insurance exchanges would be fully functional. However, the effect of a tax on high-cost insurance plans and the work of an Independent Medicare Commission that are key cost-saving aspects of the Senate bill would not have had a chance to have full effect.

Particularly, the work of a Medicare commission in altering provider payment rates to change the incentives associated with fee-for-service payment could have spillover effects into the private insurance market that could reduce cost inflation and therefore premium growth.

So, premium reductions in the employer-based market could be larger in later years, and premium increases in the individual market might be smaller. If the tax on high-cost insurance were applied to more policies (it will apply to the top fifth of policies in 2016) and the Medicare commission were strengthened, premiums would likely be lower, perhaps by 2016, but most importantly over the longer term. If these provisions are weakened, or removed, then premiums will be higher.

Donald H. Taylor Jr. is an assistant professor of public policy. His blog www.donaldhtaylorjr.blogspot.com is available for discussion of this article and health care reform in general. This is part of a series of articles by Donald Taylor exploring aspects of the health care reform issue originally published in the News & Observer.